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Uncooperative federalism and the abolition of limited merits review

The Turnbull Government has introduced a bill to abolish the limited merits review regime under the National Electricity and Gas Laws. The bill is a major departure from the cooperative federalism that underpins the national energy regime, and raises interesting questions about how it will operate in future.

On 10 August 2017, the Turnbull Government introduced a bill to abolish the right to seek limited merits review (LMR) of reviewable regulatory decisions under the national energy regulation regime.

By a process of ‘cooperative federalism’, those decisions are currently made by a Commonwealth body (the Australian Energy Regulator (AER)) pursuant to uniform legislation passed by the States (the National Electricity Law and the National Gas Law), and reviewed by a Commonwealth tribunal (the Australian Competition Tribunal) exercising jurisdiction conferred by State law.

The effect of the proposed bill is that, although the National Electricity Law and the National Gas Law provide a right to apply for review in the Australian Competition Tribunal, it will no longer have any jurisdiction to hear such matters.

Further, the proposed bill provides that a decision of the AER is not to be subject to merits review by any body established under the law of a State, notwithstanding that the AER is itself exercising powers conferred by State law.

The bill followed an earlier announcement made on 20 June 2017.

Erosion of the national consensus

In the delicate interplay of State and Commonwealth jurisdiction, coordinated by the COAG Energy Council, the Commonwealth’s proposal to unilaterally abolish the LMR regime is certainly a bold step.

The LMR regime was previously reviewed by the COAG Energy Council in 2012 – 2013, and amended in several respects. A further review was conducted in 2016, which included a review of options for the LMR regime to be abolished or further reformed.

On 14 December 2016, the Energy Council announced that there was no consensus on the need for the LMR regime to be abolished, but there was in-principle agreement for further ‘significant and immediate reform’. The Energy Council provided an update on the progress of those reforms following its meeting on 17 February 2017.

Following tensions between the Commonwealth and the States over issues such as the South Australian blackouts earlier this year, and increased political pressure over energy prices, the Commonwealth has departed from the COAG consensus and taken unilateral steps of its own.

What are the practical consequences?

If the LMR procedure is abolished, one consequence will be a renewed focus on the original determination by the AER itself. The other likely outcome is a shift towards judicial review.

A significant criticism of the LMR process was that it diverted the attention of network businesses from constructive engagement with the AER in the course of making its original determination, and led to a focus on the Competition Tribunal as the true regulatory decision-maker. The Chair of the AER, Paula Conboy, has suggested that abolishing the LMR regime will lead to a less adversarial approach between the AER and the network businesses it regulates, and will encourage the network businesses to engage more with consumers. Even allowing for the prospect of judicial review, it is likely that the number of regulatory appeals will be reduced, although it is arguable whether this will result in the AER making better decisions, or worse ones.

However, where distribution determinations routinely allocate revenue in the hundreds of millions of dollars, it is likely that the network businesses will shift their focus to the possibility of judicial review. Although it is clear that the grounds for judicial review will be narrower than those available under the LMR process, there will be a sufficient financial incentive for the network businesses to pursue them.

A further consequence is that judicial review will also be less final. One benefit of the Competition Tribunal was that it could either remit a determination to the AER, or make a new determination in its place. Although the 2014 amendments to the LMR regime created a bias towards remittal, that bias could conceivably have been reversed in the interests of finality. Notoriously, AER determinations involve a complex interplay between numerous economic models and building blocks. Accordingly, the process for re-making a determination that has been set aside and remitted is not a quick or straightforward one. The risk remains that any new determination may also be challenged and set aside, leading to further delays and regulatory uncertainty until a final resolution is reached.

On one hand, the case against the LMR regime argued that it had been gamed by the network businesses, who used their superior financial resources to seek out and win those battles that would grant them increased revenue at the expense of consumers. The outcome of LMR proceedings in the Competition Tribunal showed that many resulted in increased revenue for the network businesses, and some affirmed the regulator’s decision, but none had resulted in the network revenues being reduced.

On the other hand, the LMR regime included substantial measures to promote the involvement of consumer stakeholders and advocates, and to protect them from adverse cost orders in proceedings before the Competition Tribunal. If AER determinations can only be challenged on judicial review, those measures will no longer apply, and consumer advocates will be restricted to the limited rights to intervene, and the very limited opportunity for protective costs orders that are ordinarily available in the Federal or Supreme Courts.

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